PROVIDENCE, R.I. (WPRI) – Former Lifespan CEO George Vecchione’s compensation package soared to nearly $8 million in his second-to-last year as chief executive of Rhode Island’s most powerful hospital group, a Target 12 investigation has discovered.

Vecchione’s compensation totaled $7.88 million in 2011, according to the annual IRS Form 990 filed by the not-for-profit, which owns Rhode Island Hospital, The Miriam Hospital, Bradley Hospital and Newport Hospital.

It marked the second time during a four-year period when Vecchione’s seven-figure compensation spiked. An earlier Form 990 filing reviewed by Target 12 shows Vecchione’s pay package totaled $9.5 million in 2008.

Vecchione, 67, retired as Lifespan’s CEO at the end of last year and was succeeded by Dr. Timothy Babineau. He still owns a waterfront home in Warwick.

All told, Vecchione’s compensation from Lifespan amounted to $39.2 million between his hiring in September 1998 and his retirement in December 2012, according to data obtained from the organization by Target 12. That includes his salary, bonuses and various benefits.

The new revelations about Vecchione’s pay come as Lifespan struggles with an ongoing budget shortfall. Last spring Babineau announced the health system would need to cut spending by as much as $150 million to deal with “significant financial challenges.” The nonprofit posted a net loss of more than $3 million during the nine months ended June 30, Target 12 has learned.

CEO ‘returned a sizable economic dividend’

Lifespan declined Target 12’s request to interview Vecchione or a member of the hospital group’s board of directors about his compensation. But in a statement, board chairman Scott Laurans defended the nearly $40 million Lifespan paid to Vecchione, saying he turned around a hospital system that was in financial trouble when he arrived there from New York Presbyterian Healthcare System.

“Mr. Vecchione rebuilt the system’s financial infrastructure to address market conditions at the time,” Laurans told Target 12. “The investment made in Mr. Vecchione returned a sizable economic dividend to the state and the Lifespan system.” Lifespan paid Vecchione an average of about $2.45 million a year, he said.

Helene Macedo, a nurse at Rhode Island Hospital who is president of its United Nurses & Allied Professionals union chapter, expressed outrage when she learned about Vecchione’s $7.88-million pay package from Target 12.

“My initial reaction is it’s totally offensive,” said Macedo, who’s worked at the hospital for 28 years. “It’s excessive. When they come to our own frontline workers and are constantly asking us to do more with less, to then see this number is – it’s just not imaginable.”

Macedo also expressed surprise that Lifespan paid Vecchione more than $7 million for a second time in four years after recalling “what they had said back a couple of years ago, that it was a one-time shot. I mean, that isn’t the number I expected to see.”

“I don’t think anyone is really worth that amount of money,” she said.

Staff, research grew during tenure

Laurans said more than half of Vecchione’s 2011 pay package – $4.4 million – was a one-time payout from his executive retirement plan, and that the amount “had been accrued and earned over his years of employment.” Vecchione’s 2011 base salary was $928,502. He also got a retention payment from Lifespan that year in return for staying through 2012 while the board searched for his successor.

Laurans emphasized the longer-term legacy of Vecchione, an accountant who rose through New York’s hospital industry before coming to Rhode Island in 1998. He was tasked with turning around the then-four-year-old Lifespan network, which had lost $3.5 million in the 1997-98 fiscal year under then-CEO William Kreykes.

Between 1998 and 2011, the number of employees at Lifespan grew from 9,241 to 12,430; research funding jumped from $29 million to $81 million; and more than $1 billion was spent on new construction and technology investments, according to the nonprofit. Lifespan’s net income hit a high of $102 million in its 2006-07 fiscal year, before the downturn in Rhode Island’s economy.

More recently, however, Rhode Island Hospital has laid off workers and ordered a hiring freeze. “We have made significant financial improvements, but what we’re hearing from the hospital now is, again, they’re heading into some difficult financial times,” Macedo said. “So are we really better?”

For $7.88 million, she suggested, the hospital could “get lots more bedside nurses, technologists, therapists at the bedside taking care of patients, which is really where they should be spending the money, to achieve the safe quality care that we all, as health care workers, want for our patients.”

Macedo added that she expected the nurses at Rhode Island Hospital would be “frustrated” by Vecchione’s pay in part because Lifespan has stopped matching contributions to their 403b retirement accounts. “Then we see numbers like this – it’s just going to be really, really disappointing to my members,” she said.

High pay ‘a self-fulfilling prophecy’

The disclosure of another eye-popping Vecchione pay package comes as executive compensation at nonprofit health systems is being closely scrutinized nationwide.

In March, a much-discussed Time magazine cover story criticized what it termed “a uniquely American gold rush” that has “transformed tax-exempt ‘nonprofit’ hospitals into the towns’ most profitable businesses and largest employers, often presided over by the regions’ most richly compensated executives.”

The Time story’s author, Steven Brill, told Target 12 that Vecchione’s 2011 payout was “about as high as I’ve seen, but it’s not totally outside the realm of what I’ve seen. Which is the problem.” He said many hospitals defend CEO pay by using outside consultants’ recommendations and peer comparisons, “which is a self-fulfilling prophecy because all the peers in these ‘non-profits’ seem overpaid.”

Laurans said Lifespan’s board has an independent compensation committee, which he chairs, that determines executive pay annually following “consultation with outside experts who specialize in executive compensation for the health care industry and understand Lifespan and our market.”

The board’s approach to compensation is designed to “attract the high-caliber leadership necessary to run this complex health care system” and to reward those who “meet or exceed agreed-upon aggressive performance goals,” he said.

Total CEO pay at Lifespan, including bonuses and benefits, “falls between the 50th and 75th percentile” when compared with pay for peers at “health care organizations that are similar in size and stature (e.g., a system comprised of multiple partners that includes a teaching hospital),” Laurans said.

A review of 2011 IRS filings by Modern Healthcare, an industry publication, found that the 25 highest-paid nonprofit health CEOs in the country received median total compensation of $3.8 million, including a median base salary of $1.1 million.

The highest-paid executive uncovered by the review turned out to be a case similar to Vecchione’s: Central Georgia Health System CEO Donald Faulk received $8 million in 2010 due to a large retirement payout, the publication said.

Federal filings for 2011 reviewed by Target 12 show that among Rhode Island executives outside the nonprofit hospital sector, CVS Caremark CEO Larry Merlo earned $12 million, Hasbro CEO Brian Goldner earned $7.6 million, and former Brown University President Ruth Simmons earned $1.3 million.

AG: No authority over exec pay

Vecchione’s pay has been a point of controversy in Rhode Island for years now.

The disclosure of his $9.5-million compensation package for 2008 caused consternation among lawmakers. Sen. Michael McCaffrey, D-Warwick, and Rep. Peter Kilmartin, D-Pawtucket, proposed legislation in 2009 to cap hospital executives’ compensation. The bill died in the House amid industry opposition.

“Some of the hospitals that regularly come to the state looking for more money are the same ones that are paying outrageous salaries to their CEOs,” McCaffrey, who is a potential successor to Senate President M. Teresa Paiva Weed, said at the time. He added: “The resources just don’t exist to justify paying millions to executives at hospitals.”

Kilmartin was elected Rhode Island’s attorney general in 2010, but his spokeswoman, Amy Kempe, said that under state law the attorney general’s charitable trust unit has “no specific authority to dictate or investigate the compensation for hospital executives” even though Lifespan is a nonprofit holding company and operates nonprofit charitable hospitals.

“Because Lifespan is a not-for-profit provider, it is the responsibility of its board of directors to set compensation packages for executives,” Kempe told Target 12. “The attorney general certainly encourages the board to ensure that executive compensation packages are in line with similar-sized health care networks in the region.”

Kempe also said that Mass. Attorney General Martha Coakley, who made headlineswhen she probed compensation at Blue Cross & Blue Shield of Massachusetts, “has very different statutory and regulatory roles than the AG’s office in Rhode Island, specifically when it comes to health care and insurers.”

State lawmakers took a more modest step related to hospital executives’ pay this year when they enacted a bill crafted by Sen. Joshua Miller, D-Cranston.

The new law requires hospitals to submit a summary of their finances, including the amounts earned by their five highest-paid employees or contractors, to the R.I. Health Care Planning and Accountability Advisory Council by Jan. 1 each year. The disclosure would mirror what hospitals already report in their IRS 990 forms.

Lifespan losing millions this year

Meanwhile, the CEO transition from Vecchione to Babineau at the start of this year occurred just as Lifespan began to experience a significant financial squeeze.

Financial filings show that during the first nine months of Lifespan’s 2011-12 fiscal year – Vecchione’s last full financial year in charge – Lifespan’s operations earned $29 million on revenue of $1.2 billion. But during the first nine months of its 2012-13 fiscal year, Lifespan’s operations lost nearly $8 million on revenue of $1.3 billion as growth in expenses continued to climb.

After taking into account revenue from investments and other sources other than patients, Lifespan suffered a net loss of $3.4 million during the nine months ended June 30, 2013, compared with a net gain of $46 million during the same period the previous year, the filings show.

Laurans did not respond directly to a question about whether Lifespan’s board failed to align Vecchione’s compensation with the nonprofit’s long-term financial health, saying the challenges facing the hospital network – federal sequester cuts, reductions in insurance reimbursements and rising demand for charity care – are “being felt throughout the health care industry.”

“We are addressing these unprecedented issues head on, and firmly believe that we again have the best management team in place to lead this organization as we continue to fulfill our mission to improve the health of the people we serve, while also making a major contribution to the economic livelihood of the state,” he said.

Blue Cross & Blue Shield of Rhode Island, which along with the federal government is a top source of revenue for Lifespan, pushed back at Laurans’ suggestion that the insurer isn’t paying the hospital network enough for care.

“BCBSRI has consistently worked hard with the provider community to change the way health care is provided, with a goal of ensuring that patients receive high-quality care at an affordable price,” Mike Hudson, chief financial officer at Blue Cross, said in a statement.

“Our approach has been consistent with both the requirements of [the Office of the Health Insurance Commissioner] and the desire of the business community and individual Rhode Island residents for access to more affordable care,” he said. The health insurance commissioner sets premium rates in Rhode Island.

Lifespan spokeswoman Jane Bruno declined to disclose how much the nonprofit paid Vecchione or Babineau, his successor, in 2012. That amount won’t be revealed until Lifespan files a new Form 990 with the IRS next year. Babineau earned $979,129 in 2011 as chief executive of Rhode Island Hospital.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim